Full text
Program Evaluation Division
Office of the Legislative Auditor
State of Minnesota
Unemployment Insurance Program:
Efforts to Prevent and Detect the
Use of Stolen Identities
2022
EVALUATION REPORT
Program Evaluation Division
The Program Evaluation Division was created within
the Office of the Legislative Auditor (OLA) in 1975.
The division’s mission, as set forth in law, is to
determine the degree to which state agencies and
programs are accomplishing their goals and
objectives and utilizing resources efficiently.
Topics for evaluations are approved by the
Legislative Audit Commission (LAC), which has
equal representation from the House and Senate and
the two major political parties. However, evaluations
by the office are independently researched by the
Legislative Auditor’s professional staff, and reports
are issued without prior review by the commission or
any other legislators. Findings, conclusions, and
recommendations do not necessarily reflect the views
of the LAC or any of its members.
OLA also has a Financial Audit Division that
annually audits the financial statements of the State
of Minnesota and, on a rotating schedule, audits state
agencies and various other entities. Financial audits
of local units of government are the responsibility of
the State Auditor, an elected office established in the
Minnesota Constitution.
OLA also conducts special reviews in response to
allegations and other concerns brought to the
attention of the Legislative Auditor. The Legislative
Auditor conducts a preliminary assessment in
response to each request for a special review and
decides what additional action will be taken by OLA.
For more information about OLA and to access its
reports, go to: www.auditor.leg.state.mn.us.
Evaluation Staff
Judy Randall, Legislative Auditor
Caitlin Badger
Gretchen Becker
Eleanor Berry
Stephanie Besst
Sarah Delacueva
Scott Fusco
Will Harrison
David Kirchner
Kelly Lehr
Lucas Lockhart
Ryan Moltz
Jodi Munson Rodríguez
Kaitlyn Schmaltz
Laura Schwartz
Katherine Theisen
Caitlin Zanoni-Wells
To obtain reports in electronic ASCII text, Braille,
large print, or audio, call 651-296-4708. People with
hearing or speech disabilities may call through
Minnesota Relay by dialing 7-1-1 or 1-800-627-3529.
To offer comments about our work or suggest an
audit, investigation, or evaluation, call 651-296-4708
or e-mail legislative.auditor@state.mn.us.
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OFFICE OF THE LEGISLATIVE AUDITOR
STATE OF MINNESOTA • Judy Randall, Legislative Auditor
Room 140 Centennial Building, 658 Cedar Street, St. Paul, Minnesota 55155-1603 • Phone: 651-296-4708 • Fax: 651-296-4712
E-mail: legislative.auditor@state.mn.us • Website: www.auditor.leg.state.mn.us • Minnesota Relay: 1-800-627-3529 or 7-1-1
O L A
March 2022
Members of the Legislative Audit Commission:
The Department of Employment and Economic Development (DEED) administers Minnesota’s
Unemployment Insurance (UI) program, which provides cash benefits to eligible individuals who
have become unemployed. Due to its size, the UI program can be a target for various types of
fraud. This evaluation focused on DEED’s efforts to prevent and detect a specific type of fraud:
fraudulent applications from those who steal individuals’ identities to apply for benefits in their
names, or who take over real applicants’ accounts to divert those applicants’ benefits.
We found that DEED uses a variety of processes to prevent and detect the use of stolen identities
in the UI program, some of which we found effective. However, we also found that DEED does
not collect the necessary data to evaluate these processes sufficiently, and it has not established
metrics or methods for doing so.
Because a significant portion of the fraud prevention and detection processes that we reviewed as
part of this evaluation are classified as not public under Minnesota Statutes 2021, Chapters 13 or
268, we have redacted significant portions of this report. Further, due to the extent of not public
information contained in Chapter 3 of this report, we have not published it with the rest of the
report; however, a redacted version of Chapter 3 is available upon request.
This evaluation was conducted by Laura Schwartz (project manager), Stephanie Besst, and
Scott Fusco. DEED cooperated with the evaluation, and we thank them for their assistance.
Sincerely,
Judy Randall
Legislative Auditor
O L A
OFFICE OF THE LEGISLATIVE AUDITOR
March 2022
Room 140 Centennial Bldg.
658 Cedar Street
St. Paul, MN 55155-1603
legislative.auditor@state.mn.us
www.auditor.leg.state.mn.us
Tel: 651-296-4708 • Fax: 651-296-4712
Minnesota Relay: 1-800-627-3529 or 7-1-1
Summary
Unemployment Insurance Program:
Efforts to Prevent and Detect the
Use of Stolen Identities
Not-Public Subject Matter
Under state law, many of the fraud prevention and detection processes that we discuss in this report are
classified as nonpublic security information or are otherwise classified as not public.1 As a result, we
have redacted all not-public information from the public version of this report, and have provided the
Department of Employment and Economic Development (DEED) with an unredacted version. This
summary lists all of our public findings and recommendations.
Background
•
Unemployment Insurance (UI) is a joint federal-state program; the UI Division within DEED
administers the program in Minnesota.
•
Employers pay for UI program benefits. Under state law, eligible unemployed workers may
receive weekly UI benefits of up to 50 percent of their prior average weekly wages, up to a
maximum set in law. Only individuals who are unemployed through no fault of their own, who
are able and available to work, and who worked in “covered employment” are eligible for
benefits.
•
Individuals attempt to defraud the UI program in a variety of ways. In this report, we focused on
the division’s efforts to prevent and detect fraud by “imposters” and “hijackers.” An imposter is
an individual who uses the identity of someone who does not already have a UI account to create
an account in their name. A hijacker is an individual who accesses and takes over a genuine
accountholder’s existing account to steal their benefits.
•
The UI Division’s information technology system contains a complex set of automated rules that
verify applicants’ identities and determine their eligibility for benefits. The division also uses
information from employers to crosscheck the accuracy of information that applicants submit.
Division staff manually review some information that applicants and employers provide to verify
applicants’ identities and determine their eligibility for benefits.
• In response to the COVID-19 pandemic, federal and state policymakers authorized temporary
changes to the UI program. UI Division officials told us a drastic increase in UI applications
during the pandemic, paired with temporary changes to program requirements, strained the
division’s ability to perform its standard fraud prevention and detection processes.
1 Minnesota Statutes 2021, 13.37, subds. 1(a), 1(b), and 2(a); 13.39; and 268.19, subd. 1.
S-2
Unemployment Insurance Program: Efforts to Prevent and Detect the Use of Stolen Identities
Reporting and Investigations
•
The reports that the UI Division submits to the U.S. Department of Labor do not capture the full
extent of possible fraud that the UI program experiences, particularly the threat that imposters
and hijackers pose. And, state law does not explicitly require DEED to report information about
fraud in the UI program to the Minnesota Legislature.
o Recommendation ► The Legislature could consider requiring DEED to report, on a
regular basis, about fraud in the UI program.
•
The UI Division focuses more on preventing the loss of program dollars by imposters and
hijackers than on investigating those individuals. The division has referred few cases to law
enforcement in recent years.
o Recommendation ► The UI Division should evaluate its processes for referring fraud
cases to the Bureau of Criminal Apprehension for investigation.
o Recommendation ► The UI Division should submit a formal request to the
U.S. Department of Labor’s Office of Inspector General for additional coordination and
resources in investigating and combatting fraud from imposters and hijackers.
Fraud Prevention and Detection
•
In Fiscal Year 2021, the UI Division received nearly 24,000 fraud
allegation reports from the public, most alleging an imposter applied for
benefits using a stolen identity. UI Division staff reviewed most of the
fraud allegation reports and associated accounts in our sample quickly.
•
The UI Division regularly conducts data analyses to identify and lock
accounts with suspicious characteristics that indicate they may have been
opened by imposters or hijackers. These processes were effective in
quickly identifying and locking the suspicious accounts in our sample.
•
During the COVID-19 pandemic, the UI Division began temporarily
locking all accounts with certain characteristics to protect against
phishing attacks, which likely affected payments to some genuine
applicants.
•
The UI Division relies on applicants to identify when it has incorrectly
locked their accounts, which may cause burdens for those applicants.
•
While temporary changes to the UI program may have addressed policy needs during the
pandemic, they also complicated the UI Division’s ability to prevent and detect fraud. Amid
challenges presented by the pandemic, the division instituted new screening processes to prevent
payments to imposter accounts.
•
The UI Division’s new imposter screening processes provided time for the division to stop initial
payments on suspicious accounts; in June 2021, the division stopped payments on about
2,500 suspicious accounts—more than one-third of all new accounts opened that month.
While DEED uses
a variety of
processes to help
prevent and detect
the use of stolen
identities in the UI
program, it has not
measured the
efficacy of those
processes or the
extent to which
they may affect
timely payments
to applicants.
Summary
S-3
•
The UI Division’s new imposter screening processes delayed payments to most applicants by
more than a week, even though an executive order, and subsequent legislation, temporarily
suspended the typical one-week waiting period. While the UI Division’s new imposter screening
processes helped prevent payments on suspicious accounts, they also likely created burdens for
some genuine applicants who were entitled to benefits.
o Recommendation ► The UI Division should develop processes to proactively investigate
accounts that may be incorrectly identified as suspicious.
•
The UI Division has not established metrics or methods for evaluating the efficacy of its data
analysis processes or its new imposter screening processes, nor has it collected the data to
perform such evaluations.
o Recommendations ► The UI Division should: (1) establish metrics and methods for
evaluating the efficacy of its data analysis processes and imposter screening processes;
(2) evaluate these processes on a regular basis; (3) collect the necessary data to conduct
such evaluations; and (4) use such evaluations to refine its processes.
o Recommendation ► As the initial challenges created by the COVID-19 pandemic
subside, the UI Division should reevaluate some of the changes it implemented during the
pandemic to prevent and detect fraud, as those changes competed with its responsibility
to issue prompt payments to eligible applicants.
Summary of Agency Response
In a letter dated March 11, 2022, Department of Employment and Economic Development (DEED)
Commissioner Steve Grove said that the COVID-19 pandemic, and the expansion of UI benefits during
the pandemic, created an opportunity for cybercriminals. But, he said, DEED responded quickly to the
various challenges presented by the pandemic.
The Commissioner suggested that it may be duplicative for DEED to report to the Minnesota Legislature
in addition to the federal government, as OLA recommends that the Legislature consider. He also
disagreed with OLA’s finding that some of the new fraud prevention and detection processes that DEED
instituted during the pandemic delayed payments to most applicants. In addition, he said DEED in fact
took certain actions discussed in the report to prevent a delay in benefits created by cybercriminals.
And, he said OLA misstated a purpose of Executive Order 20-05, which allowed workers “to become
eligible for unemployment benefits as quickly as possible.”
The Commissioner said that DEED is committed to continually monitoring and updating its approach to
detecting and stopping cybercriminals, as recommended by OLA. He said DEED has a responsibility to
work to maintain a balance between stopping cybercriminals and ensuring that genuine applicants can
access the benefits for which they are eligible. The Commissioner said that DEED took, and continues
to take, effective measures to ensure that the state’s “UI application has a robust and resilient response
to active and emergent cyberthreats.”
The full evaluation report, Unemployment Insurance Program: Efforts to Prevent and Detect the Use of
Stolen Identities, is available at 651-296-4708 or: www.auditor.leg.state.mn.us/ped/2022/uifraud.htm
Table of Contents
1
Introduction
3
Chapter 1: Background
3
Program Overview
6
Fraud
8
Identity Verification and Eligibility Determination Processes
10
COVID-19 Pandemic
15
Chapter 2: Fraud Reporting and Investigations
15
Fraud Reporting
18
Fraud Investigations
Agency Response
Introduction
ny program that distributes public dollars can be subject to fraud. Program integrity
is especially important in large programs, like Minnesota’s Unemployment
Insurance (UI) program, which distributed more than $775 million in benefits in Fiscal
Year 2019. The program—which is overseen by the U.S. Department of Labor (USDOL)
and administered by the Minnesota Department of Employment and Economic
Development (DEED)—provides workers who are unemployed through no fault of their
own with temporary partial wage replacement.
In June 2021, the Legislative Audit Commission directed the Office of the Legislative
Auditor (OLA) to evaluate UI fraud. Fraud is a multifaceted problem, which can take
numerous forms in the UI program. In scoping this evaluation, we focused on issues
that fall under greater state control, rather than federal control, and that OLA has not
recently audited, among other factors. For example, in 2021, OLA’s Financial Audit
Division audited the extent to which DEED correctly determined applicants’ eligibility,
paid the correct benefits amounts, and recouped overpayments, among other things.1
Therefore, we did not revisit the subjects of that audit in this program evaluation.
For the most part, we did not evaluate DEED’s efforts to prevent or detect fraud
committed by employers or individuals who misrepresent their eligibility for benefits.
Rather, in this program evaluation, we focused narrowly on DEED’s efforts to prevent
and detect fraudulent applications from those who steal individuals’ identities to apply
for benefits in their names, or who take over real applicants’ accounts to divert those
applicants’ benefits. During the early months of the COVID-19 pandemic, both media
outlets and USDOL reported increased fraud attempts by such individuals.
In this evaluation, our key evaluation questions included:
• What processes does DEED use to prevent and detect fraudulent applications?
• How effective are DEED’s processes for preventing and detecting fraudulent
applications?
To conduct this evaluation, we used a variety of methods. We reviewed state and federal
legal requirements, as well as fraud prevention and detection practices recommended by
the federal government. We also examined DEED’s fraud prevention and detection
processes and interviewed DEED officials to learn about those processes. In addition, we
analyzed a sample of the fraud allegation reports that DEED receives from the public, as
well as other program data, to determine how well DEED prevents and detects fraud.
Under state law, many of DEED’s fraud prevention and detection processes are classified
as nonpublic security information, or are classified as not public for other reasons.2 We
have redacted all not-public information from chapters 1 and 2 of this report. We have
also provided another chapter (Chapter 3), which contains largely not-public information,
to DEED. A redacted version of Chapter 3 is available upon request.
1 The Financial Audit Division conducted this audit as part of the state’s federally mandated audit of state
programs that receive federal funding. See State of Minnesota, Minnesota Management and Budget, 2020
Financial and Compliance Report on Federally Assisted Programs for the Year Ended June 30, 2020
(St. Paul, 2021).
2 Minnesota Statutes 2021, 13.37, subds. 1(a), 1(b), and 2(a); and 268.19, subd. 1.
A
Chapter 1: Background
innesota’s Unemployment Insurance (UI) program provides eligible unemployed
workers with income while they search for new employment.1 Because the program
distributes payments to a large number of workers each week, it can be a target for fraud.
In this chapter, we provide an overview of the UI program and the types of fraud that
the program experiences. We also discuss the program’s processes for verifying the
identity and determining the eligibility of applicants, as well as some challenges the
program faced during the COVID-19 pandemic.
Program Overview
Unemployment Insurance is a joint federal-state program; the UI Division within
the Department of Employment and Economic Development (DEED) administers
the program in Minnesota.
The U.S. Department of Labor (USDOL) is responsible for setting UI program policies,
ensuring that state programs comply with federal law, developing performance metrics,
and monitoring states’ performance. Federal law establishes basic parameters that
states must follow in administering their UI programs, but states also have flexibility in
how they administer their programs.2
The UI Division within DEED is responsible for processing UI applications, determining
applicants’ eligibility, and issuing timely payments, among other things. According to the
division, at the end of Fiscal Year 2021, it had about 400 full-time-equivalent staff who
carried out these duties.
Benefits
Under state law, eligible unemployed workers may receive weekly UI benefits of
up to 50 percent of their prior average weekly wages, up to a maximum set in law.
State law establishes the amount and duration of UI benefits for Minnesota workers.
Generally, eligible individuals who apply for benefits may receive weekly cash
payments of up to 50 percent of their prior average weekly wages, up to a dollar cap set
in law.3 Typically, individuals may receive benefits for up to 26 weeks, or until their
cumulative benefits amount to 33.3 percent of their total prior annual wages, whichever
is lower.4 However, in periods of high state unemployment, they may be able to receive
benefits for an extended period of time.5
1 Minnesota Statutes 2021, 268.03, subd. 1.
2 Social Security Act, 42 U.S. Code, Chapter 7 (2019); and Federal Unemployment Tax Act, 26 U.S. Code,
Chapter 23 (2019).
3 See Minnesota Statutes 2021, 268.07, subd. 2a, for more details on how individuals’ weekly benefit
amounts are calculated.
4 Minnesota Statutes 2021, 268.07, subd. 2a(c); and 268.035, subds. 4 and 27.
5 Minnesota Statutes 2021, 268.115.
M
4
Unemployment Insurance Program: Efforts to Prevent and Detect the Use of Stolen Identities
To receive benefits, eligible individuals
must submit an initial application and
weekly requests for benefits. The UI
Division uses the information that
applicants submit to determine both their
initial and ongoing eligibility for benefits,
as well as the amount of their cash benefits
each week. Applicants request benefit
payments on a weekly basis through their
UI accounts, which they establish and
access via a Web portal on the UI
Division’s website.
An eligible applicant should receive their
first benefit payment the third week after
they initially apply, according to the UI
Division. This lag time occurs for two main
reasons. First, applicants request benefits
for a given week after that week has passed.
Second, under Minnesota law, applicants
may not receive benefits during the first
week that they would otherwise be eligible
for them—this week is
referred to as an applicant’s “nonpayable week.”6 So, typically an
applicant can receive their first payment the third week after they
initially apply, for their second week of eligibility. Exhibit 1.1
illustrates this timing. Under certain circumstances, applicants may
also back-date their initial applications by one week to receive a
retroactive payment for a week of unemployment that occurred
before they submitted their initial application.7
Eligibility
Only individuals who are unemployed through no fault of their own, who are
able and available to work, and who worked in “covered employment” are
eligible for UI benefits.
Both state and federal law establish eligibility requirements for UI benefits. We outline
some of those key requirements in Exhibit 1.2. One such requirement is that only
individuals who worked in “covered employment” may be eligible for benefits.8
Covered employment includes work performed by an individual who is considered “an
6 Minnesota Statutes 2021, 268.085, subd. 1(6).
7 Minnesota Statutes 2021, 268.07, subd. 3b(a). An initial application for UI benefits is effective the
Sunday of the calendar week that the individual submitted the application.
8 Minnesota Statutes 2021, 268.035, subds. 4, 11-12, 15(1), 20, and 27; and 268.07, subd. 2(a); and
Minnesota Rules, 3315.0555, https://www.revisor.mn.gov/rules/3315, accessed June 15, 2021.
Definition
Nonpayable week: Under state
law, an applicant may not receive
benefits during the first week they
are otherwise eligible for them.
— Minnesota Statutes 2021,
268.085, subd. 1(6)
Application Timing
Consider an individual who becomes
unemployed on Monday, January 9, and
applies for benefits on Tuesday, January 10.
January
Sun
Mon
Tue
Wed
Thu
Fri
Sat
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
The individual’s first benefit week would start
on Sunday, January 8 (because benefit
weeks always start on a Sunday). But, that
week would be the applicant’s “nonpayable
week.” On January 22, the applicant could
submit a request for—and receive—benefits
for the week of January 15.
Exhibit 1.1
Background
5
employee under the common law [definition] of employer-employee and not an
independent contractor.”9
Funding
Employers pay for the UI program.
The UI program is funded through federal and state taxes on and reimbursements by
employers.10 A federal tax pays for several aspects of the UI program, including grants
to cover state programs’ administrative costs, a share of extended UI benefits, and loans
to states when they temporarily lack the funds to pay for benefits, among other things.
To receive federal funding for program administration, states must meet a variety of
federal requirements, such as administering their programs in ways that ensure benefits
are paid in a timely manner.11 Minnesota’s UI program expended $52.5 million in
federal grant funding for state Fiscal Year 2020.12
Minnesota’s UI Division also collects funds from employers, which pay for program
benefits. The division collects these funds via two methods: (1) reimbursements on
actual benefits paid and (2) quarterly payroll taxes.13 Certain employers, including the
State of Minnesota, its political subdivisions, and American Indian tribes, must use the
9 See Minnesota Rules, 3315.0555, for state rules for determining whether a worker should be classified as
an employee or an independent contractor. In addition to independent contract work, a variety of other
types of work are not considered covered employment under Minnesota law, including certain types of
agricultural, religious, student, and sales work, among others. Further, certain types of workers, including
railroad workers, recent former Armed Forces servicemembers, and civilian federal employees are eligible
for benefits through separate federal UI programs (which are also administered by the UI Division).
10 Only employers that provide “covered employment” pay for the program.
11 42 U.S. Code, sec. 503(a) (2019); and 20 CFR, sec. 640 (2021).
12 State of Minnesota, Revised 2022-2023 Biennial Budget (St. Paul, March 2021), 79.
13 Minnesota Statutes 2021, 268.051, subd. 1(a); 268.052, subds. 1-2; 268.0525; 268.053, subd. 1(a); and
268.194.
To be eligible for UI benefits in Minnesota, individuals must, among other things:
Be unemployed, or have
substantially reduced hours,
through no fault of their own.
Be available for, actively
seeking, and willing to accept
suitable employment when
offered.
Have sufficient earnings from
“covered employment” over
the past four quarters.
Be authorized to work legally
in the U.S.
Participate in reemployment
assistance services, if
directed to do so.
Not be working or
volunteering 32 hours or
more per week.
Not be incarcerated or
performing court-ordered
community service.
Not be attending or on
vacation from a secondary
school.
Not already be receiving UI
benefits under federal law or
another state’s laws.
Not be receiving certain other
benefits or payments, such
as Workers’ Compensation,
Social Security, severance,
backpay, or retirement
income.
Exhibit 1.2
6
Unemployment Insurance Program: Efforts to Prevent and Detect the Use of Stolen Identities
reimbursement method unless they elect to pay quarterly
taxes instead.14 Nonprofit organizations may elect to use the
reimbursement method as well, instead of paying quarterly
taxes.15 All other employers must pay quarterly taxes. The
UI Division determines a given employer’s quarterly tax rate
based on a number of factors, including the amount of UI
benefits paid in the recent past to that employer’s former
workers.16 Minnesota General Fund dollars do not pay for
any aspect of the UI program.17
Fraud
The UI program distributes a large number of weekly cash payments each year. In
Fiscal Year 2019, it paid out $775 million in benefits.18 Given the size of the program,
and the speed at which the program issues such payments, it is not surprising that it can
be a target for fraud. In this section, we briefly discuss some of the kinds of fraud that
the program faces, as well as the UI Division’s responsibilities to prevent and detect
that fraud.
Types of UI Fraud
Individuals attempt to defraud the UI program in a variety of ways.
Under the law, making false statements or representations to obtain or to prevent
someone else from obtaining UI benefits constitutes fraud.19 Individuals who commit
UI fraud are subject to both administrative and criminal penalties.
Individuals—including applicants and employers, as well as those who collude with
them—attempt to defraud the UI program in a variety of ways. For example, employers
might misclassify their workers as independent contractors to avoid paying UI taxes on
their wages. Employers might also provide false information to the UI Division to
prevent individuals from obtaining benefits for which they are eligible, or to help
individuals who do not qualify for benefits obtain them. Likewise, individuals may
14 Minnesota Statutes 2021, 268.052, subds. 1-2; and 268.0525.
15 Minnesota Statutes 2021, 268.053, subd. 1(a).
16 Minnesota Statutes 2021, 268.047; and 268.051, subds. 2-3 and 6.
17 The Legislature appropriated $25 million from the General Fund for Fiscal Year 2021 to cover program
costs in case federal funds did not arrive in time. Laws of Minnesota 2020, Seventh Special Session,
chapter 2, art. 3, sec. 2.
18 These figures include benefits paid from the regular UI program as well as the Unemployment
Compensation for Federal Employees program, the Unemployment Compensation for Ex-Servicemembers
program, and the Extended Benefits program. U.S. Department of Labor, Employment and Training
Administration, ETA 5159: Claims and Payment Activities (Washington, DC, 2021), https://oui.doleta.gov
/unemploy/DataDownloads.asp, accessed January 20, 2022.
19 Minnesota Statutes 2021, 268.18, 268.182, 268.183, and 268.184.
137,000
employers paid into
the UI program in
Fiscal Year 2019.
Background
7
misrepresent their eligibility for benefits—such as
by lying about the manner in which they separated
from their employer. One of the largest sources of
fraud in the program comes from individuals
misrepresenting their eligibility by not reporting
all of their income while receiving benefits.20
In this evaluation, we focused specifically on fraud
committed by “imposters” and “hijackers.”
Imposters use the stolen identities of individuals
who do not already have UI accounts to apply for
benefits in their names. Hijackers access and take
over legitimate UI accounts to divert the
accountholders’ benefits. UI Division officials
told us that, during the COVID-19 pandemic,
imposters and hijackers became a much larger
threat to the program than they had been
previously, which we discuss later.
Legal Requirements for Preventing and
Detecting Fraud
While the UI Division is responsible for preventing and detecting UI fraud, it has some
flexibility in how it carries out this responsibility. For example, state law requires the
division to prevent waste or unnecessary spending of public money, but it does not
specify the kinds of fraud prevention or detection activities that the UI Division must
conduct within the UI program.21
Similarly, while federal law specifies some activities that states must perform to prevent
or detect UI fraud, states also have discretion in this area.22 For example, as we discuss
later in the report, federal law requires state UI programs to regularly audit samples of
UI accounts to measure the accuracy of benefit payments, using federally established
methodologies.23 Additionally, USDOL interprets federal law as requiring states to
perform various activities to prevent and detect fraud as a condition to receive federal
administrative grants, but states have flexibility over some of these activities.24 USDOL
also recommends various fraud prevention and detection activities for states to conduct,
such as analyzing program data for accounts with suspicious characteristics.
20 OLA’s Financial Audit Division has previously audited the UI program’s compliance with federal
eligibility criteria. State of Minnesota, Minnesota Management and Budget, 2020 Financial and
Compliance Report on Federally Assisted Programs for the Year Ended June 30, 2020 (St. Paul, 2021),
150-155.
21 Minnesota Statutes 2021, 116J.011, (1).
22 42 U.S. Code, secs. 503(a)(1) and (6) (2019); and 20 CFR, sec. 614, Appendix C, parts 7510-7515 (2012).
23 20 CFR, secs. 602.20 and 602.21 (2021).
24 20 CFR, sec. 614, Appendix C, part 7511 (2012); U.S. Department of Labor, Employment and
Training Administration, Unemployment Insurance Program Letter, 23-20 (Washington, DC, 2020); and
U.S. Department of Labor, Employment and Training Administration, Unemployment Insurance Program
Letter, 28-20 (Washington, DC, 2020).
Definitions
Fraud: Making false statements
or representations to obtain or
prevent someone else from
obtaining UI benefits.
Imposter: An individual who
uses the identity of someone who
does not already have a UI
account to create an account in
their name.
Hijacker: An individual who
accesses and takes over a
genuine accountholder’s existing
account to steal their benefits.
8
Unemployment Insurance Program: Efforts to Prevent and Detect the Use of Stolen Identities
Identity Verification and Eligibility Determination
Processes
In this section, we briefly discuss how the division uses its information technology
system, employers, and manual staff processes to verify applicants’ identities and
determine their eligibility for benefits.
Information Technology System
The UI Division’s information technology system contains a complex set of
automated rules that verify applicants’ identities and determine their eligibility
for benefits.
The UI Division’s information technology system (“UI System”) contains a Web portal
that both applicants and employers use to open and manage their UI accounts. Most
applicants use the Web portal to submit their initial applications as well as their weekly
requests for benefits; employers use it to review or dispute applications submitted by
former employees, among other things. The UI System uses the information input by
applicants and employers to attempt to verify an applicant’s identity and determine their
eligibility for benefits.
As required by federal law, the UI System crosschecks
certain application information, including applicants’
Social Security numbers and legal authority to work in
the U.S., against information in external databases.25
When the UI System needs additional information
from an applicant to determine their eligibility for
benefits, it automatically creates an “eligibility issue”
within the system. In many, but not all, circumstances,
the UI System will not release a payment to an
applicant until an eligibility issue is resolved. When the UI System generates an
eligibility issue, it prompts the applicant to fill out a questionnaire with additional
information. In some cases, the UI System also prompts the applicant’s former
employers to provide information about their former employee—such as about the
manner in which the employee left the employer—so the division can determine the
applicant’s eligibility.
25 42 U.S. Code, sec. 503(f) (2019). We did not review UI System compliance with federal requirements
as part of this evaluation.
Definition
Eligibility Issue: A flag in
the UI System that indicates
that the division needs
additional information to
determine an applicant’s
eligibility for benefits.
Background
9
Employer Processes
The UI Division uses information from employers to crosscheck the accuracy of
information that applicants submit.
Employers are also an important part of the UI program’s process for verifying
applicants’ identities and determining their eligibility for benefits. State law requires
employers to submit “quarterly wage detail reports” to the UI Division with the names
and Social Security numbers of each employee, the employees’ wages, and the number
of hours that employees worked that quarter.26 The division uses the information in
these reports to check the accuracy of applicant-reported information, such as whether
an applicant really worked for an employer for whom they said they worked, or whether
they earned the wages they said they earned.
The division also encourages employers to raise eligibility issues on applications. State
law requires the division to notify applicants’ recent employers when they apply for
benefits.27 This notification gives employers an opportunity to raise within the UI
System eligibility issues about which the division might not know. For example, an
employer could raise an eligibility issue if an employee who was discharged for cause
tried to obtain benefits.
The division also relies on employers to help resolve eligibility issues. For example,
under certain conditions (such as being a victim of sexual harassment) an individual
who quits their job could still be eligible for benefits.28 If an individual indicates on
their application that they quit their job, then the division might request that both they
and their former employer complete a questionnaire with details about the
circumstances behind their departure. The division then compares their responses with
their former employer’s responses—and other available evidence—to determine
whether they are eligible for benefits. If a former employer does not respond to a
request for information, then the UI Division may make an eligibility determination
without their input, using the evidence available. Because employers’ UI tax rates are
contingent upon the amount of UI benefits paid to their former employees (as we
discussed earlier), they have an incentive to respond to such requests for information.
Staff Processes
UI Division staff manually review some information that applicants and
employers provide to verify applicants’ identities and determine their eligibility
for benefits.
Although some of the UI program’s eligibility determination and identity verification
processes are automated, others require direct involvement by UI Division staff. The
UI Division maintains a Customer Service Center whose staff answer questions from
both individuals and employers, help individuals complete their applications over the
phone, and transfer calls from individuals who speak languages other than English to
26 Minnesota Statutes 2021, 268.044, subd. 1(a).
27 Minnesota Statutes 2021, 268.101, subd. 1(b).
28 Minnesota Statutes 2021, 268.095.
10
Unemployment Insurance Program: Efforts to Prevent and Detect the Use of Stolen Identities
interpreters. Senior staff in the Customer Service Center called “adjudicators” handle
more complex calls. For example, they manually review information or documentation
that applicants and employers submit that is necessary to resolve eligibility issues.
They also determine when an applicant’s actions constitute “misrepresentation” (that is,
fraud), such as if an applicant failed to report earnings. If an adjudicator determines
that misrepresentation occurred, the UI System automatically applies a penalty.29
Staff in the Customer Service Center typically do not resolve cases involving suspected
imposters or hijackers. When staff suspect a caller may be an imposter or hijacker, or
when they receive calls from a genuine applicant whose identity or account has been
stolen, they
perform various tasks to verify the identities of referred
accountholders. For example, they may require applicants to mail in additional
documentation
. Staff
then may compare those documents against information in external databases. They
may also ask accountholders to take additional actions that those attempting to commit
fraud are unlikely to do
.
If an applicant or an employer does not agree with an eligibility determination, then
they may appeal the decision to a UI law judge within 20 days of a determination.30
UI law judges are attorneys employed by the UI Division to hear and rule on these
appeals; they must follow procedures outlined in rules.31 Applicants and employers
may appeal a UI law judge’s ruling to the Minnesota Court of Appeals.32
COVID-19 Pandemic
The COVID-19 pandemic impacted the UI program significantly. In this section, we
discuss the state’s unemployment levels during the pandemic, temporary changes to the
UI program in response to the pandemic, and challenges that the pandemic created for
the program.
Unemployment Levels
Unemployment in Minnesota rose sharply at the beginning of the COVID-19 pandemic.
In February 2020, the state’s seasonally adjusted unemployment rate was 3.3 percent,
with about 103,600 unemployed persons.33 Just three months later, in May 2020, that
rate reached 11.3 percent, with about 348,300 unemployed persons. The peak
29 Under state law, if an individual receives a UI payment because they misrepresented themselves, they
must receive a penalty of 40 percent of the amount overpaid. An individual who has misrepresented
themselves to obtain benefits is also guilty of theft and subject to criminal sentencing. Minnesota Statutes
2021, 268.18, subd. 2; 268.182; and 268.183.
30 Minnesota Statutes 2021, 268.101, subd. 2(f).
31 Minnesota Statutes 2021, 268.105; and Minnesota Rules, Chapter 3310, https://www.revisor.mn.gov/rules
/3310, accessed June 15, 2021.
32 Minnesota Statutes 2021, 268.105, subd. 7.
33 Minnesota Department of Employment and Economic Development, Local Area Unemployment
Statistics (St. Paul, 2021), https://apps.deed.state.mn.us/lmi/ui/Results.aspx, accessed October 6, 2021.
Background
11
pandemic unemployment rate surpassed the peak rate during the Great Recession by
more than three percentage points, as Exhibit 1.3 shows.
Temporary Program Changes
In response to the COVID-19 pandemic, federal and state policymakers
authorized temporary changes to the UI program.
For example, the U.S. Congress approved supplemental UI programs that temporarily
offered benefits for extended periods of time (as many as 53 additional weeks through
one program) and provided supplemental payments on top of applicants’ regular weekly
benefits (as much as $600 extra per week through one program).34 One of the programs
also offered benefits to self-employed, contract, and “gig” workers, who are not
typically eligible for UI benefits.35
Additionally, in Minnesota, Governor Walz temporarily suspended certain UI program
requirements to make it easier for applicants to receive benefits. In mid-March 2020,
the Governor issued an executive order stating that “strict compliance” with the statute
governing Minnesota’s UI program be suspended.36 Among other things, the order
temporarily suspended the requirement that applicants wait one week before receiving
34 Coronavirus Aid, Relief, and Economic Security Act, Public Law 116-136, 134 Stats. 318 and 323,
secs. 2104 and 2107, March 27, 2020; and American Rescue Plan Act of 2021, Public Law 117-2, 135
Stat. 119, sec. 9016, March 11, 2021.
35 Coronavirus Aid, Relief, and Economic Security Act, Public Law 116-136, 134 Stat. 313, sec. 2102,
March 27, 2020. A “gig” worker is someone who works temporary jobs as an independent contractor.
36 State of Minnesota Emergency Executive Order 20-05, “Providing Immediate Relief to Employers and
Unemployed Workers During the COVID-19 Peacetime Emergency,” March 16, 2020. The order was in
effect throughout the COVID-19 peacetime emergency (March 16, 2020, through July 1, 2021). Laws of
Minnesota 2021, First Special Session, chapter 12, art. 2, sec. 23.
Minnesota’s unemployment rate reached 11.3 percent during the COVID-19 pandemic,
several points higher than during the Great Recession.
Exhibit 1.3
8.0%
11.3%
0%
2%
4%
6%
8%
10%
12%
2006
2008
2010
2012
2014
2016
2018
2020
Calendar Year
Great
Recession
Covid-19
Pandemic
Unemployment
Rate
(Seasonally
Adjusted)
12
Unemployment Insurance Program: Efforts to Prevent and Detect the Use of Stolen Identities
benefits.37 In late March, the Legislature affirmed that aspect of the Governor’s order,
passing the temporary suspension of the waiting (i.e., “nonpayable”) week into law.38
Program Challenges
UI Division officials told us a drastic increase in UI applications during the
pandemic, paired with changes to program requirements, strained the UI
Division’s ability to perform its standard fraud prevention and detection
processes.
Amid high unemployment and
temporary changes to program
requirements, Minnesota’s UI
applications increased dramatically
during the pandemic, according to
federal reports. As Exhibit 1.4 shows,
the UI Division received around
1.7 million and 766,000 initial
applications in calendar years 2020
and 2021, respectively—the first two
years of the pandemic.39 In contrast, in
the five calendar years preceding the
pandemic (2015-2019), the division
received an average of only about
250,200 initial applications per year.
Likewise, according to federal reports,
the division paid out approximately
$4.8 billion and $2.6 billion in benefits
in calendar years 2020 and 2021,
respectively; but in the five preceding years, it paid out an average of only approximately
$801 million.40 A division official, however, told us the figures in these federal reports
37 The suspension applied to accounts established between March 1, 2020, and December 31, 2020. The
federal government pledged to reimburse states that suspended their nonpayable weeks for the cost of the
benefits paid during those weeks.
38 Laws of Minnesota 2020, chapter 71, art. 2, sec. 21.
39 These figures include initial applications to the regular UI program as well as the Unemployment
Compensation for Federal Employees program, the Unemployment Compensation for Ex-Servicemembers
program, the Extended Benefits program, and two pandemic UI programs (the Pandemic Emergency
Unemployment Compensation program and the Pandemic Unemployment Assistance program).
U.S. Department of Labor, Employment and Training Administration, ETA 5159: Claims and Payment
Activities (Washington, DC, 2021), https://oui.doleta.gov/unemploy/DataDownloads.asp, accessed
January 20, 2022; and U.S. Department of Labor, Employment and Training Administration, ETA 902P:
Pandemic Unemployment Assistance Activities (Washington, DC, 2021), https://oui.doleta.gov/unemploy
/DataDownloads.asp, accessed January 20, 2022.
40 U.S. Department of Labor, Employment and Training Administration, ETA 5159: Claims and Payment
Activities (Washington, DC, 2021), https://oui.doleta.gov/unemploy/DataDownloads.asp, accessed
January 20, 2022; and U.S. Department of Labor, Employment and Training Administration, ETA 902P:
Pandemic Unemployment Assistance Activities (Washington, DC, 2021), https://oui.doleta.gov/unemploy
/DataDownloads.asp, accessed January 20, 2022.
Initial UI applications rose sharply in 2020 and
2021, during the COVID-19 pandemic.
Exhibit 1.4
Initial
Applications
(in millions)
0.5
1.0
1.5
2.0
2015 2016 2017 2018 2019 2020 2021
Calendar Year
Background
13
are incomplete. The offical estimated the division actually paid out closer to $9.7 billion
and $5.7 billion in calendar years 2020 and 2021, respectively.41
Although temporary changes to the UI program may have supported policy needs
during the pandemic, they complicated the UI Division’s ability to combat fraud.
For example, suspension of the nonpayable week reduced the amount of time the
division had to screen new accounts for fraud before releasing payments to those
accounts. Similarly, because certain workers who were not normally eligible for
benefits (such as self-employed persons) could receive benefits under one of the
temporary UI programs, the division could not use some of its standard methods to
detect fraud, such as comparing the income that applicants attested they earned against
records provided by employers. Additionally, UI Division officials told us that the
increased size of the benefits offered during the pandemic made the program a more
attractive target for imposters and hijackers—because those fraudsters could receive a
larger payout over a shorter period of time.
41 These figures include all UI programs that the UI Division administered in calendar years 2020 and 2021.
Chapter 2: Fraud Reporting and
Investigations
s policymakers strive to protect the integrity of large public programs, it is natural
for them to wonder how much fraud exists in those programs and whether those
who attempt to defraud those programs are being held accountable. During the
COVID-19 pandemic, the UI program experienced a significant increase in application
volume, and with it, an increase in fraud risk. In particular, fraud attempts by imposters
and hijackers became a much larger threat than they had been previously.1 In this
chapter, we discuss the extent to which the Department of Employment and Economic
Development’s (DEED’s) Unemployment Insurance (UI) Division reports and
investigates fraud, particularly by imposters or hijackers.
Fraud Reporting
We begin the chapter by discussing the extent to which the UI Division reports UI fraud
to policymakers—the U.S. Department of Labor (USDOL) at the federal level, and the
Minnesota Legislature at the state level.
Federal Fraud Reporting
The reports that the UI Division submits to the U.S. Department of Labor do not
capture the full extent of possible fraud that the program experiences,
particularly the threat that imposters and hijackers pose to the program.
USDOL requires state UI programs to report on a quarterly basis the amount of fraud
that they experience, including the number of cases of fraud and the dollar amounts of
benefits paid in those cases, among other things.2 But, given narrow reporting
definitions, challenges associated with reporting imposter and hijacker fraud, and an
increased workload caused by the pandemic, the reports that the UI Division submits to
USDOL do not paint a full picture of the fraud that the program may face.
1 As we discussed in Chapter 1, an imposter is an individual who uses the identity of someone who does
not already have a UI account to create an account in their name. A hijacker is an individual who accesses
and takes over a genuine accountholder’s existing account to steal their benefits.
2 42 U.S. Code, sec. 503(a)(6) (2019); 20 CFR, sec. 602.11 (2021); U.S. Department of Labor,
Employment and Training Administration, Unemployment Insurance Handbook No. 401, 5th edition
(Washington, DC, July 2017), 155-173; and U.S. Department of Labor, Employment and Training
Administration, ETA 227: Overpayment Detection and Recovery Activities (Washington, DC, 2021),
https://oui.doleta.gov/unemploy/DataDownloads.asp, accessed October 18, 2021.
A
16
Unemployment Insurance Program: Efforts to Prevent and Detect the Use of Stolen Identities
First, the UI Division reports to USDOL only on cases in which it has determined that
an overpayment was made. An overpayment is a benefit payment made by the division
to an applicant for which the applicant was not legally entitled.3 The division does not
report cases in which it cannot identify the imposter or hijacker who received the
overpayment. Nor does it report suspected fraud attempts by imposters or hijackers that
the division stopped before issuing an overpayment.
Second, imposter and hijacker fraud can be harder to confirm—and thus report on—
than other types of fraud in the UI program. The division may be able to confirm fairly
easily that an individual has been earning wages while improperly collecting UI
benefits if the division receives relevant evidence to that effect—such as wage detail
reports—from that individual’s employer.4 But, confirming imposter and hijacker
fraud can be more difficult. One way the division
detects imposter fraud is by screening accounts in the
UI System for suspicious characteristics, which we
discuss in Chapter 3.5 When the division finds a
suspicious account, it stops or prevents payments to the
account and then requires the accountholder to provide
evidence
to
verify their identity. If the accountholder provides such
evidence, then the division can be relatively assured that
the account is not fraudulent. But, if the accountholder does not respond to the request,
then the division still may not be sure whether the account is fraudulent. The
accountholder could be an imposter who abandoned the account after receiving the
division’s request, or they could be a genuine applicant who did not respond to the
division’s request for any number of reasons—such as getting a job.
Third, UI Division officials acknowledged that the program’s reporting efforts suffered
during the pandemic amid the increased workload; they said the division likely has not
yet investigated or reported all of the fraud that the program experienced during the
pandemic. As Exhibit 2.1 shows, the division reported only 1,170 cases of confirmed
fraud to USDOL in calendar year 2020, which was 77 percent fewer than it reported in
calendar year 2019, the year before the pandemic began.6 Despite these figures,
3 A fraud overpayment is an “overpayment for which material facts…are found to be knowingly
misrepresented or concealed (i.e., willful misrepresentation) by the [applicant] in order to obtain benefits to
which the [applicant] is not legally entitled.” U.S. Department of Labor, Employment and Training
Administration, Unemployment Insurance Handbook No. 401, 5th edition (Washington, DC, July 2017), 163.
4 As we discussed in Chapter 1, state law requires employers to submit quarterly wage detail reports to the
UI Division with the names and Social Security numbers of each employee, the employees’ wages, and
the number of hours that employees worked that quarter. Minnesota Statutes 2021, 268.044, subd. 1(a).
5 As we discussed in Chapter 1, applicants create accounts in the UI Division’s information technology
system (UI System) through a portal on the division’s website when they apply for benefits. Applicants
submit their weekly requests for benefits through these online accounts.
6 These figures include only fraud cases from the regular UI program, not from the Unemployment
Compensation for Federal Employees program, the Unemployment Compensation for Ex-Servicemembers
program, the Extended Benefits program, or three pandemic UI programs (the Federal Pandemic
Unemployment Compensation program, the Pandemic Emergency Unemployment Compensation program,
and the Pandemic Unemployment Assistance program). U.S. Department of Labor, Employment and
Training Administration, ETA 227: Overpayment Detection and Recovery Activities (Washington, DC,
2021), https://oui.doleta.gov/unemploy/DataDownloads.asp, accessed October 18, 2021.
The UI Division often lacks
conclusive evidence that an
account was opened by an
imposter or a hijacker, which
makes those cases difficult to
confirm as fraud—and thus—
to quantify.
Fraud Reporting and Investigations
17
division officials told us that
fraudulent activity dramatically
increased—rather than
decreased—during the
pandemic.
Minnesota was not alone among
states in reporting a decrease in
fraud in recent years. Combined,
states reported about 40 percent
fewer cases of fraud in calendar
year 2020 than in calendar year
2019, despite the fact that
USDOL reported an increased
risk of fraud during this time.7
Additionally, in a May 2021
report, the USDOL Office of
Inspector General found that
about 60 percent of states did not report cases of fraud associated with special pandemic
UI programs, as required by law.8
State Fraud Reporting
State law does not explicitly require DEED to report information about fraud in
the UI program to the Minnesota Legislature.
Unlike federal law, state law does not specifically require DEED to report on fraud in
the UI program.9 State law does, however, require DEED to produce an annual report
with a description of the department’s programs, the number of clients served by those
programs, an evaluation of those programs, and recommendations for changes or
improvements to them.10 Although DEED provides some basic information about the
UI program in its annual report, it does not include any information about UI fraud.11
7 U.S. Department of Labor, Employment and Training Administration, ETA 227: Overpayment Detection
and Recovery Activities (Washington, DC, 2021), https://oui.doleta.gov/unemploy/DataDownloads.asp,
accessed October 18, 2021.
8 The report did not specify whether Minnesota was among the states that did not report on fraud
associated with the special pandemic UI programs. U.S. Department of Labor, Office of Inspector
General, COVID-19: States Struggled to Implement CARES Act Unemployment Insurance Programs
(Washington, DC, 2021), 12-14.
9 Minnesota Statutes 2021, Chapters 116J and 268.
10 Minnesota Statutes 2021, 116J.0125.
11 Minnesota Department of Employment and Economic Development, Annual Report of Department
Programs and Services (St. Paul, 2020), 1-4; and Minnesota Department of Employment and Economic
Development, Annual Program Summaries, https://mn.gov/deed/about/what-we-do/agency-results
/program-summaries/, accessed December 6, 2021.
Even though fraud has likely increased in recent years,
the UI Division has reported less fraud to the federal
government.
Exhibit 2.1
Dollar Value of Fraud
Reported to USDOL
(in millions)
Fraud Cases
Reported to
USDOL
$0
$2
$4
$6
$8
$10
$12
0
2,000
4,000
6,000
8,000
2016
2017
2018
2019
2020
Calendar Year
18
Unemployment Insurance Program: Efforts to Prevent and Detect the Use of Stolen Identities
The Minnesota Legislature could consider requiring
DEED to report on a regular basis the levels of both
confirmed and suspected fraud in the program.
Because DEED does not report to USDOL
information about the level of suspected fraud—
such as overpayments made to unidentified
imposters or hijackers, or unsuccessful fraud
attempts made by suspected imposters or
hijackers—the Legislature could consider requiring
DEED to report such information. Division officials
told us that imposters and hijackers have become a
much larger threat to the program than they were prior to the start of the pandemic.
Reporting on such cases could enable the Legislature to be better informed about the
vulnerability of public funds in the UI program.
Fraud Investigations
The UI Division performs investigative activities for a variety of reasons. In this
section, we briefly discuss the kinds of investigations that the division conducts.
Investigative Activities
The UI Division focuses more on preventing the loss of program dollars by
imposters and hijackers than on investigating those individuals.
The UI Division uses a variety of processes to detect suspicious accounts that may have
been opened by imposters or hijackers, which we discuss in Chapter 3.
. For
example, as we discuss in Chapter 3, the division solicits reports of alleged fraud in the
program from the public.
.
Although the UI Division has some investigative powers, those powers are limited, and
the UI Division is not a law enforcement body. Under state law, the division has the
authority to administer oaths, take depositions, and issue subpoenas to compel
individuals to appear or produce documents necessary for the administration of the
program.12 But, the division does not have the authority to investigate imposters or
hijackers operating in other states or countries. If division staff are able to identify a
fraudster operating in Minnesota, then they may refer that person to law enforcement
(which we discuss in the next section).
.
Most of the investigative activities that the UI Division conducts are part of the
program’s eligibility determination processes. For example, adjudicators may request
information from applicants and employers to help them conclude whether an applicant
misrepresented their eligibility for benefits—such as if they failed to report earnings.
12 Minnesota Statutes 2021, 268.188.
Recommendation
The Legislature could
consider requiring DEED
to report, on a regular
basis, both confirmed
and suspected fraud in
the program.
Fraud Reporting and Investigations
19
When the division determines that an applicant received an overpayment in such cases,
it automatically applies a penalty.13 The division also operates several quality control
programs, which regularly review samples of cases to evaluate the extent to which
applicants were correctly determined as eligible or ineligible for benefits, among other
things. As part of those reviews, division staff may contact applicants and employers,
review applicant and employer records, and crossmatch data against external sources,
among other things. Federal law requires state UI agencies to conduct such reviews as
a condition of their federal administrative grants.14
Referrals
The UI Division has referred few cases to law enforcement in recent years.
the UI Division
can make referrals to law enforcement agencies for investigation and prosecution,
including to the Office of Inspector General within USDOL and to the Minnesota
Bureau of Criminal Apprehension. At the federal level, the Office of Inspector General
investigates fraud and abuse in the UI program.
Under state law, the Minnesota Bureau of
Criminal Apprehension has authority to
conduct criminal investigations.15
. According to its reports to
USDOL, the division referred no cases to the
Office of Inspector General over the last five
calendar years, and only 44 cases for state or
local prosecution, as Exhibit 2.2 shows.16
13 Minnesota Statutes 2021, 268.18.
14 42 U.S. Code, sec. 503(a)(6) (2019); and 20 CFR, sec. 602.11 (2021). As we discussed in Chapter 1,
these grants cover all of a state’s administrative costs to operate its UI program. We did not review these
quality control programs as part of this evaluation.
15 Minnesota Statutes 2021, 299C.03.
16 U.S. Department of Labor, Employment and Training Administration, ETA 227: Overpayment Detection
and Recovery Activities (Washington, DC, 2021), https://oui.doleta.gov/unemploy/DataDownloads.asp,
accessed February 4, 2022.
UI Fraud Cases Referred to Law
Enforcement, as reported to the
Federal Government
Exhibit 2.2
9
5
4
14
12
2017
2018
2019
2020
2021
Calendar Year
20
Unemployment Insurance Program: Efforts to Prevent and Detect the Use of Stolen Identities
.
.17
.
We recommend that the UI Division
evaluate its processes and criteria for
referring cases to the Bureau of
Criminal Apprehension for
investigation. The UI Division should
also assess whether it has dedicated
sufficient resources to refer such cases
and whether it has appropriately
prioritized such referrals.
We also recommend that the UI
Division submit a formal request to the
USDOL Office of Inspector General
for additional assistance, coordination,
and resources in investigating and
combatting fraud from imposters and
hijackers.
17 We reached out to representatives from the Office of Investigations within the USDOL Office of
Inspector General to learn about the extent to which such cases are being investigated at the federal level,
but they declined to speak with us.
Recommendations
• The UI Division should evaluate its
processes for referring cases to
the Bureau of Criminal
Apprehension for investigation.
• The UI Division should submit a
formal request to the
U.S. Department of Labor’s Office
of Inspector General for additional
coordination, and resources in
investigating and combatting fraud
from imposters and hijackers.
Minnesota Department of Employment and Economic Development
Office of the Commissioner
First National Bank Building, 332 Minnesota Street, St. Paul MN 55101
mn.gov/deed
March 11, 2022
Ms. Judy Randall, Legislative Auditor
Office of the Legislative Auditor (OLA)
Room 140 Centennial Building
658 Cedar Street
Saint Paul, MN 55155-1603
Dear Ms. Randall,
Thank you for the opportunity to comment on the Office of the Legislative Auditor’s (“OLA”) report on the
Unemployment Insurance (“UI”) Division’s “Efforts to Prevent and Detect the Use of Stolen Identities.” The Minnesota
Department of Employment and Economic Development (the “Department” or “DEED”), appreciates the time and effort
that was put into the review of these programs. DEED values any opportunity to improve its processes and service
delivery, and thanks the OLA team for its work on this report.
COVID-19 Pandemic
The impact of the COVID-19 Pandemic on Minnesota’s UI program – and UI programs nationally - cannot be overstated. I
reemphasize this in the context of this report because it required the program to reorient all its efforts to meet an
historic challenge.
To counteract the unprecedented impacts of the pandemic, federal and state policymakers deployed unprecedented
levels of aid and made eligibility changes to the UI programs to get benefits to workers quickly. This meant that UI
program administrators had to act quickly to increase capacity tenfold while still maintaining program integrity,
implementing several new programs, and rapidly moving to new business models (and new technology) that would
permit staff to work remotely while still maintaining security. It was a daunting challenge with no opportunity for pre-
planning.
Despite these challenges, Minnesota UI responded very quickly. All staff resources were immediately re-directed to
assisting applicants. Program technology met the challenge, permitting over two years’ worth of applications to be
accepted in just four weeks and Minnesota UI fully implemented all new federal benefit programs more quickly than any
other state.
As a result of this responsiveness, the UI program was able to provide the financial support Minnesotans urgently
needed. Nearly $15 billion in benefits were paid to 870,000 applicants, and eligible applicants received payments about
as quickly as they did prior to the pandemic.
Cybercrime
The major increases in UI benefit volumes brought on by the pandemic and federal and state government’s COVID-19
Pandemic response also created an “opportunity” for cybercriminals. Since the UI program began in 1935, there have
always been individuals who have attempted to obtain benefits by posing as someone else. These efforts were limited
for about the first 70 years of the programs because it was simply not possible for these “imposters” to get their hands
on enough identities to be more than an integrity “nuisance” for the program. Today, by contrast, the “Dark Web”
Minnesota Department of Employment and Economic Development
Office of the Commissioner
First National Bank Building, 332 Minnesota Street, St. Paul MN 55101
mn.gov/deed
enables transnational cybercriminals to buy and sell private data obtained from data breaches and culled from social
media.
This type of cybercrime is not uniquely a UI problem – it is a problem that the entire financial sector faces. Data
breaches and cybercrime are unfortunate components of the modern interconnected financial system. As such, the UI
program’s emphasis is necessarily to detect suspicious applications and stop as many of them as possible from being
processed.
The COVID-19 Pandemic, and the related expansion of federal unemployment benefits, amplified attempted actions by
cybercriminals. As the report notes, in the month of June 2021 alone, the UI program identified – and stopped payments
on - over 2,500 suspicious accounts: more than one-third of new accounts opened that month. As the report also notes,
the UI program has developed a variety of approaches and business processes to detect and stop suspicious
applications. OLA generally found that DEED took quick action on fraud allegation reports, and that DEED “processes
were effective in quickly identifying and locking the suspicious accounts” in the data OLA analyzed.
Selected Responses to OLA Report
In this section, we provide responses to selected elements of the report.
Reporting and Investigations
As the report notes, DEED already reports fraud metrics to the USDOL as required by federal law. While, as OLA notes,
the Legislature could consider requiring DEED to provide a separate report for state purposes, it may be duplicative to
do so.
OLA’s recommendation that “the UI Division should evaluate its processes for referring fraud cases to the Bureau of
Criminal Apprehension for investigation” seems to misunderstand the nature of the crime discussed in the report.
Identity fraud today is conducted transnationally by anonymous and highly distributed actors; the nature of cybercrime
makes such crimes difficult for a single state’s law enforcement division to meaningfully combat. Where culprits are
investigable, DEED has and will continue to refer fraud cases to the appropriate law enforcement authority.
OLA additionally recommends that “the UI Division should submit a formal request to the U.S. Department of Labor’s
Office of Inspector General for additional coordination and resources in investigating and combatting fraud from
imposters and hijackers.” Even prior to the pandemic, Minnesota’s UI Division, and the UI divisions of other states, had
met with staff at USDOL about encouraging other federal agencies with policing or regulatory authority to address the
activities that take place on the dark web and the ease with which cybercriminals can use online banking and by
extension UI systems to commit cybercrimes. The pandemic has highlighted the cybercriminal activities in the UI space
at a federal level, and it is understood that more federal resources are being applied to address it.
Fraud Prevention and Detection
OLA states that “[d]uring the COVID-19 pandemic, the UI Division began temporarily locking all accounts with certain
characteristics to protect against phishing attacks, which likely affected payments to some genuine applicants.” This is
misleading. Phished accounts were locked, in fact, to prevent a delay in payments. Had the UI Division not intervened
and reviewed the status of accounts, hijackers would have taken over the accounts and delayed payments to the
genuine applicant much longer. Additionally, OLA’s statement that “[t]he UI Division relies on applicants to identify
when it has incorrectly locked their accounts, which may cause burdens for those applicants” is not wholly accurate.
Applicant contacts are one method, but not the only method, which the Division uses to ensure that accounts are only
accessible by the appropriate individual.
Page 2 of 3
March 11, 2022
Minnesota Department of Employment and Economic Development
Office of the Commissioner
First National Bank Building, 332 Minnesota Street, St. Paul MN 55101
mn.gov/deed
The report states that “the UI Division’s new imposter screening processes delayed payments to most applicants by
more than a week, even though an executive order, and subsequent legislation, temporarily suspended the typical one-
week waiting period.” This misstates the purpose of the suspension of the non-payable week of benefits by Governor
Walz and the legislature. Ordinarily, applicants are not eligible to receive payment for the first week of unemployment
benefits they request. The purpose of Executive Order 20-05 was to “allow workers to become eligible for
unemployment benefits as quickly as possible” (our emphasis).1 Individuals did become eligible for unemployment
benefits as quickly as possible and received benefits for the first week of unemployment benefits as directed. DEED
similarly does not agree that the imposter screening process delayed payments to “most applicants.” The screening
process did, however, prevent substantial amounts of potentially fraudulent payments, as the report notes. And, as
noted above, Minnesota UI fully implemented all new federal benefit programs more quickly than any other state.
Regarding OLA’s recommendations that:
•
“The UI Division should develop processes to proactively investigate accounts that may be incorrectly identified
as suspicious.”
•
“The UI Division should: (1) establish metrics and methods for evaluating the efficacy of its data analysis and
imposter screening processes; (2) evaluate these processes on a regular basis; (3) collect the necessary data to
conduct evaluations; and (4) use such evaluations to refine its processes.”
•
“As the initial challenges created by the COVID-19 pandemic subside, the UI Division should reevaluate some of
the changes it implemented during the pandemic to prevent and detect fraud, as those changes competed with
its responsibility to issue prompt payments to eligible applicants.”
DEED’s responsibility is to continually work to maintain a balance between stopping cybercriminals and ensuring
genuine applicants access to the benefits they are eligible for. This is not a static calculation but will vary based on both
the number of cybercriminals that are active at any one time and the sophistication of the schemes they are using.
Cybercrime levels will vary over time based on the level of financial opportunity. With the end of the special federal UI
programs and policies, the opportunity for cybercriminals to profit from state UI systems may be reduced. In any event,
DEED is committed to continually monitoring and updating its approach to detecting and stopping cybercriminals.
Conclusion
In closing, DEED appreciates OLA’s efforts in drafting this report, and is committed to continuing to deliver high quality
services for the people of Minnesota. As noted throughout the report, DEED took, and continues to take, significant and
highly effective measures to ensure that Minnesota’s UI application has a robust and resilient response to active and
emergent cyberthreats.
Sincerely,
Steve Grove
Commissioner
1 https://mn.gov/governor/assets/2020_03_16_EO_20-05_Unemployment_Insurance_tcm1055-423379.pdf
Page 3 of 3
March 11, 2022
Recent OLA Evaluations
Agriculture
Pesticide Regulation,
2020
Agricultural Utilization Research Institute (AURI),
May 2016
Agricultural Commodity Councils,
2014
Criminal Justice and Public Safety
Driver Examination Stations,
2021
Safety in State Correctional Facilities, February 2020
Guardian ad Litem Program,
2018
Mental Health Services in County Jails,
2016
Health Services in State Correctional Facilities,
2014
Law Enforcement’s Use of State Databases,
2013
Economic Development
Minnesota Investment Fund, February 2018
Minnesota Research Tax Credit, February 2017
Iron Range Resources and Rehabilitation Board (IRRRB),
March 2016
Education (Preschool, K-12, and Postsecondary)
Minnesota Department of Education’s Role in Addressing
the Achievement Gap, March 2022
Collaborative Urban and Greater Minnesota Educators
of Color (CUGMEC) Grant Program,
2021
Compensatory Education Revenue,
2020
Debt Service Equalization for School Facilities,
March 2019
Early Childhood Programs,
2018
Perpich Center for Arts Education, January 2017
Standardized Student Testing,
2017
Minnesota State High School League,
2017
Minnesota Teacher Licensure, March 2016
Special Education, March 2013
Environment and Natural Resources
Petroleum Remediation Program, February 2022
Public Facilities Authority: Wastewater Infrastructure
Programs, January 2019
Clean Water Fund Outcomes,
2017
Department of Natural Resources: Deer Population
Management,
2016
Recycling and Waste Reduction, February 2015
DNR Forest Management, August 2014
Conservation Easements, February 2013
Sustainable Forest Incentive Program, November 2013
Financial Institutions, Insurance, and
Regulated Industries
Department of Commerce’s Civil Insurance Complaint
Investigations, February 2022
Government Operations
Office of Minnesota Information Technology Services
(MNIT), February 2019
Mineral Taxation,
2015
Councils on Asian-Pacific Minnesotans, Black
Minnesotans, Chicano/Latino People, and Indian
Affairs,
2014
Health
Emergency Ambulance Services,
2022
Office of Health Facility Complaints,
2018
Minnesota Department of Health Oversight of HMO
Complaint Resolution, February 2016
Minnesota Health Insurance Exchange (MNsure),
February 2015
Minnesota Board of Nursing: Complaint Resolution
Process,
2015
Human Services
DHS Oversight of Personal Care Assistance,
2020
Home- and Community-Based Services: Financial
Oversight, February 2017
Managed Care Organizations’ Administrative Expenses,
2015
State-Operated Human Services, February 2013
Medical Assistance Payment Rates for Dental Services,
2013
Jobs, Training, and Labor
Unemployment Insurance Program: Efforts to Prevent
and Detect the Use of Stolen Identities, March 2022
State Protections for Meatpacking Workers, 2015
State Employee Union Fair Share Fee Calculations,
July 2013
Miscellaneous
Board of Cosmetology Licensing,
2021
Minnesota Department of Human Rights: Complaint
Resolution Process, February 2020
Public Utilities Commission’s Public Participation
Processes, July 2020
Economic Development and Housing Challenge Program,
February 2019
Minnesota State Arts Board Grant Administration,
February 2019
Board of Animal Health’s Oversight of Deer and
Elk Farms,
2018
Voter Registration,
2018
Minnesota Film and TV Board,
2015
Transportation
MnDOT Workforce and Contracting Goals,
2021
MnDOT Measures of Financial Effectiveness,
March 2019
MnDOT Highway Project Selection,
2016
MnDOT Selection of Pavement Surface for Road
Rehabilitation,
2014
MnDOT Noise Barriers,
2013
OLA reports are available at www.auditor.leg.state.mn.us or by calling 651-296-4708.
OFFICE OF THE LEGISLATIVE AUDITOR
CENTENNIAL OFFICE BUILDING – SUITE 140
658 CEDAR STREET – SAINT PAUL, MN 55155